Michael Kovacs, President & CEO
This ETF offers a defensive strategy of growth and income drawing on the world’s most powerful brand names.
Harvest Portfolios Group launched a global brand leaders mandate in 2014. In a Q&A, Harvest CEO Michael Kovacs explains why the company launched the Harvest Brand Leaders Plus Income ETF (TSX: HBF, HBF.U), the thinking behind the fund and why it aligns with the Harvest strategy of conservative growth and income.
Q: Why did Harvest launch the Harvest Brand Leaders Plus Income ETF?
A: Well, it’s really the epitome of what we do. The core of Harvest’s philosophy is a combination of income and capital appreciation. The companies in this ETF are diversified, fantastic large-cap established businesses. That’s our focus – longer term positions in exceptional companies; companies like Disney, Johnson & Johnson and Caterpillar, as examples.
These are truly global and doing fantastic things. For example, Disney’s Avengers: Endgame took in $1.4 billion during the week after it opened. That’s just one of Disney’s many franchises.
Q: Tell us about the fund
A: It was a closed-end fund when we launched in 2014. We converted to an ETF in 2016 and it has been growing at a steady pace since then. I believe over time it will be our largest fund, because it really appeals to everybody and is very diversified. The companies have a minimum market capitalization of US $10 billion, must meet specific quality and growth financial metrics, have a track record for growth, good management teams and all the key attributes you look for in a great business.
Their brand power is important, having that same consistency whether it’s Canada, China, Australia or the US. They are true global leaders, the biggest and most dominant companies in their industry.
They have financial staying power and a history of profitability and rising dividends. These features mean the companies protect investor capital while providing growth. The fund is transparent and simple for clients to understand.
Q: Who is the brand leaders fund suitable for?
A: This ETF suits investors at all ages and stages. We have a Distribution Reinvestment Program (DRIP), so monthly distributions can be reinvested if you don’t want the income. A younger investor trying to build capital might use a DRIP. You get a growth vehicle that captures capital appreciation through the compounding power of the distributions.
For someone in their 50s, 60s or 70s looking to draw income, you are getting a annual yield of close to 7% paid monthly from a portfolio enhanced by an option writing strategy that reduces unit price volatility and generates a steady cash flow.
So, it really covers the full spectrum. I’m in my 50s and I own this fund. My mom’s turning 80 and has a position this ETF. We are at a time when interest rates are low and are likely to stay low for a long time.
Where is as an investor to go to capture income? This is an attractive choice.
Q: How does your covered call option strategy add value?
A: Twenty years ago, in 1999, if you had $1 million you could put that into a GIC and earn 5% or 6%, say $50,000 to $60,000 a year. Now that same GIC is earning about 1%, or $10,000. So, you have to look for other ways to generate additional income.
The Harvest Brand Leaders Plus Income ETF does that in two ways. First it generates a dividend. Depending on where the market is, that is usually around 2%. We need to yield 7%. So how do we make up the difference?
We do that with our option writing strategy. Harvest writes (sells) calls on up to 33% of each position in our equity ETFs. We use a proprietary method that consistently generates an additional income stream that is tax efficient.
Q: How does the call option strategy work?
A: A call option is an agreement between two parties that gives the option buyer the right to buy a stock at a fixed price within a specified time frame. The buyer pays a fee to the seller for that right. The seller keeps the fee regardless of what happens later.
Selling a call option is similar, but approaches the investment decision from the perspective of the seller of the option rather than the buyer. Harvest is the seller, therefore receives the fee and holds the stock If the price of the stock price drops Harvest keeps the fee and the stock, if the stock price rises, Harvest still keeps the fee but may have to sell a portion of stock. In that case Harvest would use the cash to either buy back the stock position or use it for other stock purchases.
Covered call options are a Harvest specialty and we are consistent at getting it to work in the ETF’s favour. A full explanation of our strategy can be found on our web site under the headline The Art of the Covered Call.
Q: Is there anything you would like to add?
A: The Harvest Brand Leaders Plus Income ETF is our core product, a nicely diversified large-cap ETF that’s offers long-term growth and steady income. If you can capture 7% to 9% a year, year after year, through growth and a steady income, you’re ahead of the game.
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The views and/or opinions expressed in the blog are of a general nature and are for informational purposes only. Blog contents should not be considered as advice and/or a recommendation to purchase or sell the mentioned securities or used to engage in personal investment strategies. Investors should consult their investment advisor before making any investment decision.